Introduction of store brands considering product cost and shelf space opportunity cost

Abstract

This paper studies the introduction of store brands (SBs) when the product cost, shelf space opportunity cost, and baseline sales are taken into consideration. We construct a Stackelberg model in which one retailer, acting as the leader, sells a national brand (NB) and its SB and maximizes the category profit by allocating shelf space and determining the prices for the SB and NB products. Meanwhile, an NB manufacturer, acting as the follower, maximizes its profit based on the decisions of the retailer. Our results demonstrate that the product cost of the SB (NB) and the shelf space opportunity cost are the dominating factors that determine the optimal pricing strategy. If the two costs are low, then the optimal pricing strategy is the me-too strategy (competitive strategy); otherwise, the optimal pricing strategy is the differentiation strategy. There exists a threshold of the product cost, shelf space opportunity cost, and baseline sales to decide the pricing strategy and introduction of SB.